What now Bitcoin?

Bitcoin & other cryptos have taken a sharp nosedive of ~33% from peak.  Although it may rally short-term, let’s take a look at the internals of what’s going on and where this is all heading.
People are parking Bitcoin profits on Bitfinex (biggest bitcoin exchange) into tethers, the fake token people think has 1:1 USD backing (but doesn’t). Tether will push the printing press into overdrive to try to pump Bitcoin price once again.
If this fails, there will be a run on Tether as people try to realize profits in USD. This can’t be done — the money isn’t there. At that point, holders of Tether have only one choice: buy crypto, anything, and try to transfer out to exchanges that support USD withdrawals (Bitfinex does not).
This could be the biggest spike crypto has ever seen. It’s uncertain which cryptos will spike most. For example, Bitcoin has well-known transaction problems, so would not be the transfer mechanism of choice. Probably Bitcoin Cash would be preferred, since that is relatively fast, cheap, & supported on GDAX (USD exchange).
That would mean the evisceration of the Bitfinex exchange and a sharp drop in aggregate trading volumes. The owners may opt for a big gamble to retain their profits — look for claims of a huge “hack” on Bitfinex.  This lets the Bitfinex operators steal customer funds before the collapse, Mt Gox style.  An alternate scenario is a “hack” on Tether to prevent a run on Tether in the first place. This actually happened about a month ago, 30 million Tether stolen, from a 3/4 multisig wallet (likely inside job).  Something of this magnitude may trigger government involvement.
If the crypto in Bitfinex does make it into the other exchanges, you’ll see the huge spike I mentioned.  But, since Bitcoin price will now be un-tethered from the Tether printing press, it will be very short lived and collapse once former Bitfinex customers try to realize USD profits.  Then Bitcoin could fall way below the levels we are seeing today.

Economics of merge mining

A common argument for the unique value of bitcoin is its hash power, meaning the amount of computational power (miners) dedicated to mining bitcoin. But, with merge mining, another blockchain can potentially capture the entire hash power of bitcoin with no impact on bitcoin’s network. That means that, although independent cryptos may eventually be swamped by a bitcoin monopoly, the value of bitcoin will be diluted by other chains piggybacking on its network.
The way bitcoin is mined is by miners “hashing” the existing blockchain with a random number. Hashing is a one way function that takes in some content and spits out a result. If the result meets certain “difficulty criteria”, it is accepted by the network and the miner is rewarded a coin. It is impossible to ever derive the original content from the result, which is why it’s called one way.
Merge mining works by combining the random number guesses from one chain, with those from another chain. The result will be valid on both chains. If it meets the criteria for both chains, the miner will get rewarded for both. The miner loses nothing by mining both, but gets more reward.
The economic effect of this is to increase the miners available to mine alternative chains. Since profits go up, the number of total miners goes up, which will push profits for a particular chain down. This should mean lower transaction fees for any particular chain. It also means that no chain holds a monopoly on being a transaction mechanism.
The lack of a potential monopoly means that bitcoins should be treated as a competitive payment mechanism, instead of as a monopoly. Many coins will be able to process payments, with the same hash power, even if most miners mine the bitcoin chain.  Some may be superior to bitcoin in their payment processing capabilities.
Bitcoin pipes

Bitcoin’s dubious utility value

Bitcoin fanbois point to bitcoin’s utility as a payment network. But, unlike Visa, holders of bitcoin don’t get any of the mining revenues, so there is no revenue stream on which to value a bitcoin.
Participants do need to have bitcoin to transfer funds, but they don’t need to hold it for longer than the transaction itself. Since bitcoin is limited to ~3 transactions per second, and average confirmation times are several hours, depending on network congestion, there is no need for more than a few bitcoin to accomplish all payments across the network. As an example, assuming 1 bitcoin per transaction, 3/sec * 3,600 sec/hr * 3 hr/confirmation = 32,400 bitcoin to execute all payments on the network.
Also, since bitcoin can be divided into satoshi, hundreds of millionths of a Bitcoin, there is no need to hold a particular amount of bitcoin to accomplish a transaction. The bitcoin itself just represents the transaction record, not the value of the contract, just as a record in Visa’s database represents the transaction, and is not in and of itself valuable, beyond the market price of the transaction mechanism (about 1%).
Even if holders of bitcoin shared in the mining revenues, the competitive mining market produces a flat fee per transaction, not a percentage fee, which allows the transfer of massive fortunes for a tiny fraction of a percent. It would be a much worse value proposition, for investors, than Visa.
The fiat price of a bitcoin arises from an artificial restriction on bitcoin supply & mining, and people’s expectation that these restrictions will entice others to buy their bitcoin in the future at a higher price. The “greater fool” theory. But this is separate from bitcoin’s utility as a payment network.
It is no different from other speculative phenomena such as Beanie Babies, baseball cards, and other artificially restricted commodities. People misinterpret the restriction as an ipso facto justification for a high price. Once all available cash & credit has poured into the commodity, there are no further buyers, the mania ends, and the price drops to the utility value of the commodity.  In bitcoin’s case, its utility value is close to zero.
Tether collapse scenario hindenberg style

Tether collapse scenario

Current situation with dumb money buying BTC:

  • Tether prints tethers to buy bitcoin
  • BTC-USDT price skyrockets
  • Arbitrage bots buy BTC-USD, because everyone assumes 1 USDT = 1 USD
  • BTC-USD price matches BTC-USDT price
  • Price increase brings in more dumb money USD to buy BTC, skyrocketing price further
  • Arbitrage bots sell BTC for USD, profit
  • Tether sells BTC for USD
  • Tether is now “backed” by USD — can afford to redeem tethers for the small number of people who convert USDT to USD
  • Tether pockets USD, prints more tethers …

What if the flow of dumb money slows down or stops? (due to higher prices, and simply no more mattress cash to dump into BTC)

  • Tether prints tethers to buy bitcoin
  • BTC-USDT price skyrockets
  • Arbitrage bots buy BTC-USD
  • No more dumb money = no more USD arbitrage profit
  • Less arbitrage = increasing gap between BTC-USDT and BTC-USD prices
  • Now there is arbitrage opportunity the other direction
  • Buy BTC-USD, sell BTC-USDT, sell USDT for USD
  • Tether now has to redeem tethers for USD
  • The bigger the gap, the more tethers they have to redeem
  • If they stop printing tethers, the BTC-USDT price collapses
  • If BTC-USDT price collapses, arbitrage bots buy BTC-USDT and sell BTC-USD, further collapsing BTC-USD
  • If they keep printing, the gap widens and they have to redeem more and more tethers for USD
  • At that point, the game is up and Tether will have no incentive to continue redeeming tethers.  The tether market collapses.  You can redeem 1 USDT for 1 cent.  BTC paper profits are wiped out.  Tether is left with >600 million USD in the bank.

The phenomena to watch out for in this scenario are:

  • Increasing gap between BTC-USDT and BTC-USD prices
  • Increasing volatility of USDT-USD price, followed by collapse
constitution burns

End the founding myth

What made this nation great was not the constitution imposed on it or the fake revolution against British rule. It was the relative lack of rule from 150 years before the revolution, as compared to the European monarchies, and the cultural traditions that grew from that.

The constitution failed, the revolution failed, and all they accomplished was the steady growth of despotic government that Americans originally hated. There never should have been a “United States”. In fact, if the Americans had gone down the path of liberty, the British would not have been able to stop them anyway. Their hold on the colonies was already tenuous.

This enduring myth that the revolution and constitution created liberty is the foundational error of American political consciousness. They were a step backward for liberty. Yet American conservatives, and some libertarians, fall on the crutch of the constitution, like ideological cripples. The myth must be exposed and rejected. It is the only way to accept responsibility for figuring out how to achieve liberty.

extortion and secession

Secession misses the point

Secession, as a means to anarchy, misses the point.
Peaceful secession is simply a rearrangement of the political structure to one that is more convenient for the ruling regime, either because it is more economically efficient, or reduces political tensions and makes it easier to rule. Either way, any temporary increase in liberty is allowed only because it ultimately results in more control for the elite.
Real secession, creation of a sovereign state, necessarily means war. It is the rejection of the existing authority.
Anarchy cannot be achieved by peaceful secession. It is the rejection of all authority. Leftists are power-mad and do not care about economic efficiency, other people’s views, or tolerance. They believe they are right and want to kill their evil enemies. They will not “live and let live”, because that is precisely their attitude in the existing regime. Peaceful secession from a leftist regime is a performative contradiction.
The only way we will achieve liberty is by removing the tools of power from leftists and any other power-hungry psychopaths. This potentially could be achieved by many means, such as getting a majority of people on the side of liberty, to remove democratic power from the elite. But no leftist state will tolerate an independent anarchist regime anywhere in their sphere of control (they won’t even leave Iraq alone!).
The only way to achieve separation is by war.

Bitcoin’s paper price bump

What’s behind Bitcoin’s recent price increase? I’ll tell you — and it’s not Bitcoin’s utility as a currency, or wonderful investment opportunity.
Bitfinex accounts for the largest share of BTC trading volume. Yet they stopped accepting USD deposits back in April. This inevitably spilled into restricting USD withdrawals.  After that, BTC price on their exchange went up. Why?
If you were an account holder, what would you do? I’m not able to withdraw my USD. Therefore, I’ll buy BTC so I can move it to another wallet. Hence, increased demand for BTC on their exchange, and increased price AND volume.
Other exchanges did the same; there are not many that allow USD deposits & withdrawals now.
This recent BTC price increase is caused by the fact that no one can withdraw USD!
What happens when this bottled-up demand to withdraw finally moves into USD, other fiat, or other crypto?
Updated on 10/20/2017 to reflect USD withdrawal restrictions and supporting link.

Alt-coins are vulnerable to attack

The strength of a cryptocurrency is the share of global processing power it can muster in service of its ledger.  An attack by a significant computational resource (botnet, mining pool, government supercomputer, etc.) could potentially reverse recent transactions or cause a fork of the currency.  The reason the global share matters is that computational power is fungible, and may be used in service of any cryptocurrency.

The less computational power dedicated to mining a crypto, the more vulnerable it is to attack.  Alt-coins that do not command as much hash power as Bitcoin would be first in line.

Processing power over time is governed by the price per computational unit and by the price of electricity.  For example, a spike in electricity prices or transistor prices would increase mining costs, and therefore transaction fees, possibly disrupting the usability of the currency.  A sudden drop in electricity prices or transistor prices would reduce mining costs, increasing the chance of attacks on a currency’s ledger.

Such attacks could be orchestrated, not necessarily to steal the underlying wealth of currency holders, but to accomplish secondary effects beneficial to the attacker.  For example:

  • A large investor in a particular crypto may attack a competing (smaller) crypto intruding in the space.  This implies a first-mover advantage in the cryptocurrency space and stratification of crypto, with one per defensible economic niche.  Eventually, the market may consolidate into one global crypto.
  • Momentarily disrupt the functioning of a crypto at a critical moment in its development, for maximum PR effect, to spread fear & uncertainty to potential investors and adopters.
  • Momentarily disrupt recent transactions to create uncertainty for retailers accepting the currency & consumers using it.
  • Permanently disrupt or fork a smaller currency.

You would only need to bid on computing power for a short time to cause a major disruption.  Miners are very sensitive to transaction fees, so would quickly respond to any change in market demand.  Furthermore, cloud mining operations, and cloud computing in general, provide an easy way to quickly spool up computing power for a short time, disrupt the target crypto, and spool down, thus minimizing costs.

Alt-coins based on a permissionless, global blockchain are very vulnerable to this type of attack. Eventually, even Bitcoin itself may come under attack should there be a revolutionary development in computational hardware, exploited by a group of early adopters, or a government willing to throw massive fiat to kill it once and for all.

Liberty pioneers, showing the way through the economic wilderness

Liberty pioneers: showing the world how to live without government

Libertarians living off tax money is unethical, but it’s an even bigger practical problem. It shows that living without the government teat is impossible, that living on theft is the only way. It is philosophically damaging to the idea of a voluntary society. It is also bad marketing to people who ask questions like “who will build the roads?”

There will never be a day when we simply “get rid of government”, such that everything is perfectly free. This is because no one wants to be the first to give up their government goodies. Just as unilateral free trade is better than mutual protectionism, unilateral voluntarism is better than mutual theft. We can only ever get rid of government by showing, in practical terms, how to make a living without it.

Is it difficult? Extremely! Will it mean less money and fewer opportunities than working for the government? Yes! That is the price of advancing liberty. Many people are not up to the task. But then don’t blow hot air about liberty, if you are unwilling to do what is required to bring it about. It reeks of hypocrisy. The pioneers of liberty are the ones who show how to make a living, or even be rich, without stolen tax money. If they show the way, others will follow, simply because it’s in their self-interest. And isn’t that what we say motivates people, rather than abstract principles that contradict their daily reality?

Receiving tax money is theft

Ethics of receiving government money

I had a couple of objections to my argument that living off the government is unethical.

First, if accepting a government wage is unethical, then using the roads must also be unethical.

But this is not the case if one uses the net tax payer vs. net tax taker standard.  Using the roads is simply redeeming what was stolen from me.  Earning a government wage is 100% theft.

What about using the roads without having paid any taxes?  Should the government compel this person to pay taxes in order to justify using the roads?

If one looks at the road as just a pile of stolen money, the ethical way to remedy a theft is to split the money proportionally to what was stolen, and return the money to the victims.  Since the road cannot be split physically, its use may be split, effectively as usage vouchers, for the expected lifetime of the road that was built from that theft.  In other words, privatized.

The person who infringes on the use of the road without having had anything stolen in the first place, is infringing on the usage of the people who were stolen from.  He would be responsible for compensating those privatized owners, not for paying new taxes, i.e. new thefts committed against him.

This standard is consistent with not accepting any of the government’s stolen loot, unless, and only in the amount that, one was stolen from.

A corollary objection is, doesn’t this imply a need for government borders, since illegals use roads without having paid taxes?

Punishing people collectively is not justified, just because they are foreigners.  Furthermore, no one has commited any violations prior to crossing the border, so no a priori punishment is justified.  Many end up working and having money stolen from them.  However, any who do receive more from the government than was stolen from, are also stealing, the same as Americans who do so.  So, there is no categorical difference between Americans and foreigners.  No national border is justified, any more than any arbitrary border within the country.

The second objection is, while it may be unethical to provide services to the government in exchange for stolen money, it is okay to simply receive the money, as in Social Security payments.

If someone steals your car, you can justly recover your car, since you hold the rightful title.  If they steal your car and give it to a friend, you can also justly recover your car from their friend, since they do not have any rightful claim on it.  It is unethical for the robber’s friend to receive the stolen car.

Similarly, it is unethical to accept stolen money, since the victims have a right to have their money returned, from the money handed out by the government.